A Conversation With Three Central Bankers

In Madrid on Monday I moderated a discussion on global finance
organized by the Aspen Institute Espana. The speakers were Paul
Volcker, Agustin Carstens (head of the central bank of Mexico, and a
candidate to succeed Strauss-Kahn at the IMF), and Henrique Meirelles
(until recently head of the central bank of Brazil, now in charge of
preparations for the Rio Olympics). In due course I might be able to
post a link to a recording. Meanwhile, three things struck me as
notable.

First, none of the speakers had much time for the idea that Greece's
debt would have to be restructured. Paul Volcker's impatience with this
idea especially surprised me. He is usually willing to be outspoken and
has no particular reason (unlike Carstens, for instance, a serving
rather than former central bank chief) to avoid controversy and choose
his words carefully. He usually says what he means. His point was that
a modest restructuring would make no great difference to Greece's
fiscal problem--it has to get to a primary budget surplus
regardless--and so was probably not worth the risk. Yes, I suggested,
but who said anything about a modest restructuring? An immodest
restructuring, together with "internal devaluation" (lower wages) and
further fiscal tightening, still seems to me the least bad of the
terrible alternatives that Greece and the EU are now contemplating. The
central bankers weren't having it.

Second, there is a new conventional wisdom on asset prices and
monetary policy. I asked how far, if at all, central banks should take
asset prices into account in setting interest rates. Until recently the
conventional view was that interest rates were the wrong instrument: it
would take more than an increase of, say, half a point to make a
difference if an asset-price bubble was inflating, and if prices in
general were stable, a bigger increase in rates would be inappropriate
in any case. Also, as Alan Greenspan always emphasized, you did not
know a bubble was a bubble until after it burst. At that point,
monetary policy could deal with the consequences.

Better late than never, that orthodoxy seems to be dead.
Interest-rate setting should take asset prices into account, all three
panelists said. True, that might not be enough by itself: other
instruments should also be called upon (stricter loan-to-value
regulation of mortgages, for instance, in the case of a house-price
bubble). But the idea that bubbles could not be identified except with
hindsight, or that it was enough to mop up the damage afterwards, seems
to have passed into an earlier era.

Third (this came came not from the panel but from conversations in
the margins of the event), Spanish business leaders are furious at the
way the self-inflicted ruin, as they see it, of Greece, Portugal, and
Ireland has impugned their economic reputation and blighted their
economic prospects. They think this a travesty. Spain's case is quite
different, they insist. (So it is, up to a point.) They are especially
annoyed, I was told at some length, by the way the FT and The Economist
have covered their difficulties. One told me he hoped that the Wall
Street Journal, which had been "less biased", would take over the FT.
That was harsh, I thought.

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